July 9, 2010
Delta and US Airways File For Review
US Airways and Delta Air Lines have filed a petition for review before the D.C. Circuit concerning their proposal to trade slots at New York LaGuardia and Washington Reagan airports. While the Federal Aviation Administration approved the transaction earlier this year, it did so on the condition that both carriers surrender a portion of the slots to be traded. The following summary of the case is taken from the carriers' Form 8-K filing from the Securities and Exchange Commission (available here):
In August 2009, US Airways Group, Inc. and US Airways, Inc. (“US Airways”) entered into a mutual asset purchase and sale agreement with Delta Air Lines, Inc. (“Delta”). Pursuant to the agreement, US Airways would transfer to Delta certain assets related to flight operations at LaGuardia Airport in New York, including 125 pairs of slots currently used to provide US Airways Express service at LaGuardia. Delta would transfer to US Airways certain assets related to flight operations at Ronald Reagan Washington National Airport (“Washington National”), including 42 pairs of slots, and the authority to serve Sao Paulo, Brazil and Tokyo, Japan. One slot equals one take-off or landing, and each pair of slots equals one roundtrip flight. The closing of the transactions under the agreement is subject to certain closing conditions, including approvals from a number of government agencies, including the U.S. Department of Justice, the U.S. Department of Transportation (“DOT”), the Federal Aviation Administration (“FAA”) and The Port Authority of New York and New Jersey.
In February 2010, the FAA issued a proposed order conditionally approving the transaction. However, the proposed order contemplated the divestiture of 20 of the 125 slot pairs involved at LaGuardia and 14 of the 42 slot pairs at Washington National. In March 2010, Delta and US Airways announced a proposed alternative transaction which contemplated fewer divestitures than required by the FAA’s February 2010 proposed order. In a final decision dated May 4, 2010, the FAA rejected the alternative transaction proposed by Delta and US Airways, and affirmed its proposed order. In connection with this action by the FAA, Delta and US Airways were obligated to advise the FAA no later than July 2, 2010 whether they intended to proceed with the transaction as described in the FAA’s May 4, 2010 action. On July 2, 2010, Delta and US Airways jointly advised the FAA that they did not intend to proceed with the transaction under the conditions imposed by the FAA, and that Delta and US Airways are prepared to complete the transaction without those conditions. Also on July 2, 2010, Delta and US Airways jointly filed with the United States Circuit Court of Appeals for the District of Columbia Circuit a notice of appeal of the FAA’s order seeking to set the FAA’s order aside. We cannot predict the outcome of this judicial proceeding.
Blog readers with access to the Daily Airline Filings website can read the airlines' petition for review here.
July 8, 2010
Does the Market Power of a Dominant Airline Spill Over to Its Rivals?
Blog readers may be interested to read Alessandro V.M. Oliveira's Does the Market Power of a Dominanet Airlne Spill Over to its Rivals? (Latin American Center for Transportation Ecomomics Working Paper, June 16, 2010) (available from SSRN here). From the abstract:
Some of the main sources of market power in the airline industry are related to route and airport dominance. What is more, Borenstein (1989) found evidence that the market power of a dominant airline does not spill over to its rivals on the same route. Here I investigate this lack of “umbrella” effect by examining an air shuttle market with recent liberalization in which the major carrier has more than 50 % of the market share of both route and endpoint airports. Dominance in air shuttle markets is crucial since most passengers are usually very time-sensitive and a firm with a broader portfolio of departures is more likely to conquer their loyalty. The main contribution of the paper is the use of a competition model rather than a non-structural pricing equation. By employing a demand system with stages of budgeting and a conduct parameter to capture rivalry among heterogeneous players, I estimate the extent of deviation from Bertrand-Nash equilibrium after deregulation measures and two episodes of cost shock. As route-level marginal costs are unobservable, I then use observed shifters at the aircraft level to control for costs and economies of density. The model also permits an evaluation of the impact of the regulatory reform on the behavior of firms. The main finding is that the dominant carrier managed to persistently sustain higher-than-average markups whereas the smaller rivals had marginal-cost or below-marginal-cost pricing. Additionally, the higher estimated markups of the dominant firm were not due to anticompetitive behavior but solely to product differentiation - a higher perceived product quality by very time-sensitive consumers. This is indicative not only that the regulatory reform was successful in enhancing competition but also, from an antitrust perspective, it induced a situation in which the potential effects of market dominance on margins were offset.